Originally Posted by dory36
Start maybe with just a list of actions each year. Or a basic spreadsheet.
For the inputs, I think the only change needed is in the "How Is It Invested"
tab, where you add a new choice called "Buckets", subdivided into 1/2/3, with a
dollar figure for 1 and 2 (and the remainder in 3). Then, for each bucket, there
is a list of asset classes like those in the "mixed portfolio" choice. (To save space,
omit stock classes from Bucket 1, omit fixed income from Bucket 3, etc). It's the
user's job to decide the starting dollar figure for 1 and 2, based on number of years
income you want to have in each, what growth you want to assume for 2, etc.
For annual actions, first, the growth. For each bucket, compute the growth for
each asset class using the historical data for that asset class. Do NOT rebalance
(within) the bucket at this point.
Next, the spending. Spend from 1, 2, and 3 in that order, depleting each before
moving to the next. Withdraw according to the asset allocation AFTER growth,
before any rebalancing. When they're all empty, it's a "failure".
Finally, the tough part, the rebalancing between buckets. The goal is to make
1 and 2 "full" again, but this may not always be optimal (see below). But what
does "full" mean - perhaps the original dollar value grown by inflation ?
First, you completely replenish-to-"full" 1 from 2 (withdrawing from 2 in
proportion to its allocation AFTER its growth computed earlier in the annual
actions, before any rebalancing within 2). This may empty 2 more than
halfway, we'll deal with that later.
Then you have to decide how much of 2 to replenish from 3 - striking some
balance between the level of depletion of 2 (easy to quantify) and the perceived
value of 3 (a little trickier, perhaps the overall return-since-retirement and/or
the previous year's return). Maybe you bring 2 up to 50% of "full", if 3 has
simply beat inflation since the previous year. Then you bring 2 up to 75%
if 3 has had overall return since retirement which beats inflation. And you fill
2 completely if the overall return-since-retirement of 3 has been higher than
X%. Again, you withdraw from 3 in proportion to its allocation AFTER growth.
Finally, if 2 is STILL below 50% (after replenishing 1 and rebalancing from 3).
move enough money from 1 back to 2 to either bring 2 to 50% or to equalize
their amounts, whichever comes first.
Again, all moves OUT of buckets were done in proportion to the asset mix AFTER
growth was computed (so the more appreciated asset classes are harvested more),
and moves INTO buckets were done into cash positions. Finally, after all inter-bucket
movement is done, you rebalance WITHIN each bucket to its original asset allocation.
Hope this helps. Chime in folks. Sounds like Dory will do this if we give him
some help ! Be nice to get it close to correct the first time through, since
what we're really doing is writing the "rules" of buckets, and the performance
will depend on how good those rules are.